Stock Pick From The Engineering Sector

HERE IS WHY:

• A consistent financial record for the last five years
• Improving PAT margins
• A consistent dividend-paying company

Here is a fundamentally strong and technology driven company - Ion Exchange India – which operates in the water treatment industry and is currently exhibiting a promising future. The company has been serving the water treatment industry in India for more than four decades now. It was pioneer in introducing reverse osmosis in India. Ion Exchange is one of the oldest listed companies in India and has listed itself on the BSE way back in 1977.

The company exports its plants, equipments and chemicals to South East Asia, Japan, Europe, Africa, Egypt, the Middle East, the USA and UK, along with the neighbouring Bangladesh, Nepal, Mauritius and Sri Lanka. To benefit from the growing domestic health consciousness among all segments, it expanded its range to offer water care for homes, under the Zero B brand. The water treatment company has extended community level solutions directly as well as through NGOs, municipalities and government public health engineering departments.

Shareholding Pattern   (31/03/2013)
Promoter and Promoter Group	40.62
DII	1.27
Public	47.30
Bodies Corporate	10.27
GRAND TOTAL	100

Ion Exchange operates through three divisions. The engineering division designs, manufactures and sells medium and large size equipment for water and waste water treatment plants. This division posted a turnover of Rs 557 crore in FY13 as compared to Rs 472 crore in the previous year. Under this segment, it caters to sectors such as refineries, power, steel, food & beverages, pharmaceuticals, automobiles, hospitality etc. Its chemicals division achieved a turnover of Rs 243 crore in FY13 as compared to Rs 188 crore in the previous fiscal. The margins in the chemical division started showing some improvement to 8.7 per cent during FY13 against 7.2 per cent in the previous year. Despite the decreasing revenue under the consumer products division, the company has posted a profit of Rs 2.75 crore in FY13 against a loss of Rs 1.97 crore in the previous year.

On the financial front, the company has posted 20 per cent yearly revenue growth and posted Rs 884.45 crore during FY13 against Rs 739.63 crore in FY12. The company’s EBITDA margins have increased to 5.74 per cent this year from 4.37 per cent in FY12. This is only because of lower operating expenses which stood at Rs 808 crore. The company’s depreciation cost and finance cost have increased by 42 per cent and 33 per cent respectively against the last year. The company managed to improve its PAT margins by 16 basis points to 1.71 per cent despite this increase. The decreasing levels of water tables in urban India and erratic rainfall have increased the focus on recycling of water. This company’s innovative technology, quality products, comprehensive product mix for environment management, and research & development make its future look positive.

Ion Exchange has shown approximately 20 per cent average revenue growth in the last five years. Interestingly, its net profit has grown approximately by 25 per cent for the last five years. An ace trader and investor Rakesh Jhunjhunwala has been holding almost 6.5 per cent stake in the company for more than three years. On the valuation front, the company’s stock is trading at 9.8 x its FY13 EPS of Rs 9.80. The valuation is quite attractive considering its peer company Va Tech Wabag (a PE of 13x). Further, the company is consistent with respect to paying dividend and has a dividend yield a little more than two per cent. We thus recommend that investors enter this stock with a price target of Rs 120 over a period of one year.

LAST FIVE QUARTERS (Rs/CR)
Particulars	Mar '13	Dec '12	Sep '12	June '12	Mar '12
Income From Operations	253.67	185.37	182.08	146.22	204.07
Other Income	2.04	2.46	0.98	2.46	4.00
Interest	3.85	2.96	2.81	2.37	2.69
Tax	5.06	2.19	1.84	1.90	3.80
Net Profit	9.81	4.13	3.54	4.01	8.09
Equity Share Capital	13.30	13.58	13.58	13.57	13.56